The UK plans to hike taxes next spring on incentive compensation for private equity fund managers, a policy shift that could resonate in the US.

The tax rate on carried interest will rise to 32% in April 2025 from the current 28%, according to the budget released Oct. 30 by UK Finance Minister Rachel Reeves. The taxes apply to performance-based compensation private equity fund managers earn on successful investments.

As in the UK, the carried interest earned by US-based private equity fund managers is taxed at a lower rate than ordinary income. The shift in UK tax policy could encourage US advocates for hiking the carried interest tax to redouble their efforts.

The Labour Party pledged to raise taxes on carried interest ahead of a sweeping victory in the UK elections in July. The party's election manifesto described the rule on carried interest as a "loophole" unfairly benefiting fund managers, echoing language used in the US debate over carried interest.

Even at the higher rate, carried interest will be taxed well below the UK's top income tax rate of 45%.

UK-based attorney James Klein of international law firm Spencer WestSpencer West said in a press statement that the hike was unlikely to have a significant macroeconomic impact and that the higher tax rate would undoubtedly be welcomed as a shift toward a fairer tax policy by some. Others will worry the higher rate "might deter new investments and delay new ones which would negatively impact investment into scaling UK businesses," Klein added.

The UK budget report hints that further adjustments to the carried interest tax are coming in April 2026. The budget does not specify a target rate but says carried interest will be taxed "fully within" the income tax framework, adding that future treatment of carried interest will provide "fairer and more sustainable outcomes, while safeguarding the strength of the UK as a fund management hub."